Rev. Rul. 67-242

The Internal Revenue Service has been requested to explain the application of section 691(c) of the Internal Revenue Code of 1954. Section 691(c) of the Code permits a person, who must include in gross income for the taxable year any amount of income in respect of a decedent, to deduct for the same taxable year that portion of the Federal estate tax on the decedent's estate which is attributable to the inclusion in the estate of the value of the right to receive such amount.

To determine the deduction allowable, it is first necessary to compute the net value of the items which are to be treated as income in respect of a decedent under the provisions of section 691(a) of the Code. This net value is the value in the gross estate of all items of income in respect of a decedent, less the claims deductible for Federal estate tax purposes which represent the deductions and credits in respect of the decedent described in section 691(b) of the Code.

The estate tax attributable to such net value is an amount equal to the excess of the estate tax over the estate tax computed without including in the gross estate such net value. The recomputation of the estate tax to arrive at the latter figure is effected by excluding from the value of the gross estate the net value of all items of income in respect of the decedent. The difference between the estate tax and the estate tax as so recomputed is the total deduction allowed under section 691(c) of the Code.

Section 1.691(c)-1(a)(2) of the Income Tax Regulations provides that in computing the estate tax without including in the gross estate the net value of the items of income in respect of the decedent, any estate tax deduction (such as the marital deduction) which may be based upon the gross estate (or adjusted gross estate) shall be recomputed so as to take into account the exclusion of such net value from the gross estate.

Where for any taxable year a taxpayer receives and is required to include in his gross income an amount of income in respect of a decedent which is less than all of the income in respect of that decedent, the taxpayer may deduct under section 691(c) of the Code an amount which bears the same ratio to the Federal estate tax attributable to inclusion in the gross estate of the net value of all items of gross income in respect of that decedent, as the value in the gross estate of the right to the income in respect of the decedent included in gross income of the taxpayer for the taxable year (or the amount included in gross income, whichever is lower), bears to the value in the gross estate of all items of gross income in respect of the decedent.

The provisions of section 691(c) of the Code and section 1.691(c)-1 of the regulations may be illustrated by the following example:

A was an attorney engaged in the practice of law who kept his books by the use of the cash receipts and disbursements method. At the time of his death, A was entitled to fees for professional services rendered, to dividends declared before his death, but payable and paid to the record owners of the stock as of a date following his death, and to accrued bond interest, in the respective amounts of 30 x , 10 x , and 5 x dollars, and having values in the gross estate respectively of 29 x , 10 x and 5 x dollars. There were deducted for estate tax purposes as claims against the estate 3 x dollars for business expenses for which the estate was liable and 1 x dollars for taxes accrued on certain property which the decedent owned. In all, 4 x dollars were deducted for claims which represent amounts described in section 691(b) of the Code which are allowable as deductions to the estate for income tax purposes.

The right to the fees for professional services rendered, along with certain other properties totaling 171 x dollars, was specifically bequeathed by A to his surviving spouse. During the taxable year, the right to those fees was distributed by the executor to, and they were collected by, the surviving spouse and included in her gross income. The dividends and accrued bond interest were received by the estate and properly included in its gross income. The gross estate is valued at 415 x dollars and considering deductions of 15 x dollars, a marital deduction of 200 x dollars, and an exemption of 60 x dollars, the taxable estate amounts to 140 x dollars. The Federal estate tax on this amount is 32.7 x dollars from which is subtracted 1.2 x dollars as a credit for State death taxes paid, leaving a net estate tax liability of 31.5 x dollars. The deduction of the surviving spouse, as provided in section 691(c) of the Code, is computed as follows:

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 The value in the gross estate of the items of income